The Richest Companies for Your Portfolio

Our economy faces many headwinds today: Credit remains tight, unemployment is expected to remain elevated for an extended period of time, problems continue in housing, and although households are reducing debt, it will take some time to pay off debt loads. While businesses have been smart to hoard cash and are starting to invest it -- whether through raising dividends, share buybacks, or strategic acquisitions -- given the recent economic data there's a good chance the economy could moderate since the first quarter. The question is whether this is a short-term blip, or something more.

Investing in companies that have lots of cash, like Apple, is extremely prudent in this environment, as companies need strong balance sheets to manage through uncertain economic times and take advantage of opportunities.

There are a number of metrics you can use to evaluate a company's liquidity. One of the easiest is the current ratio (current assets divided by current liabilities), which measures the company's ability to pay off its short-term obligations. A current ratio of 1 means the company has just enough short-term assets to pay off its short-term liabilities; higher ratios mean that some current assets would be left over.

Another way to view a company's cash position is to look at cash per share. This shouldn't be looked at in isolation, though, as it's a dynamic number, and the company could be burning through its cash instead of generating more. Look for trends in cash flow alongside it. For instance, is cash flow from operations accelerating over a multiyear time period? The answer should be "yes."

OK, so now you have a couple of tools to assess a company's liquidity. How do you go about finding the good companies? One surefire way is to use The Motley Fool's CAPS screener, an excellent tool to help you identify cash-rich companies.

To find some of the best liquid companies, I searched for those that have these four traits:

Source: Motley Fool CAPS, as of July 2, 2010. *Does not include short-term investments.

This CAPS screen turned up some great companies, but a company's liquidity should be only one part of your analysis -- you also have to ask yourself whether these companies will remain cash-rich.

For example, let's take a closer look at Apple. Consumers remain cautious, and Apple is a consumer-facing company. However, the maker of the iPod, iPhone, and now the iPad showed remarkable strength in the midst of the downturn, and recently overtook Microsoft in market capitalization. If this technological whiz kid can continue churning out popular and innovative products -- which investors appear to think it can, as evidenced by its increasingly growing market cap -- cash should continue piling into its coffers.

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